This content was created by GHION.AI . This content was uploaded by GHION.AI . This is a YouTube video titled "Venture Capital is Gated Capital" (published 2021-11-03) featuring a single speaker who explains the concept of venture capital as "gated capital" — investors typically fund startups with 1–2 years of runway so companies must make significant progress before the next funding gate. The speaker contrasts the usual gated-capital paradigm with the 2021 anomaly of much larger, longer-duration financings, uses a Charles Darwin natural-selection analogy to describe how many startups fail while a few succeed, and outlines the options for companies that fail to progress (cut costs, reach breakeven/sell, or shut down).
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venture capital is gated capital, meaning there's a gate and you have to go through the gate to get to the next round. So the venture investors would give the founders 1 to 2 years' worth of capital, just enough to get to the next gate. Now this footnote here says, except in 2021. What's happening right now is investors are giving venture capital-backed companies enormous amounts of money, tens of millions, hundreds of millions of dollars that they're not going to spend for the next year or two. And so we're in something that's very unusual. We'll have to see how the industry responds. But I would say for the last 20 years, this idea of gated capital has been the normal paradigm where the company only has enough capital for a year or two and has to make a lot of progress during that year or two. We'll come back to this in Q&A about what the 2021 market environment is like. So why does this system work? Well, it's worked in the natural world for a long time. This fellow Charles Darwin came up with the idea of natural selection. And fundamentally, that happens with venture-backed companies. You have 12,000 venture capital companies funded every year. They're not all going to make it. Some of them are going to go out of business. Some will merge with others. Some will just return some amount of 50 cents on the dollar or 100 cents on the dollar after only a couple of years. And so this concept of natural selection, it works very well in in the world of biology. It also works very well in the venture capital world. So what happens if you don't make the progress? You raise your first round of venture capital or your second round, you're not doing very well, you're not growing, you're not reducing the risk for the next round of investors. What happens? You can't raise any more money. What do you do then? Well, you're losing money, you can't raise more, and you only have one of three choices: cut costs, If you have some revenue to get to breakeven, sell the business for whatever you can get or shut the business down. And this discipline of having to prove something within a year or two until your cash runs out is an important reason why the venture capital process works well.
